Consumer Prices Rise In Line With Expectations - May 13, 2011

Data issued earlier this morning by the Bureau of Labor Statistics, a division of the U.S. Labor Department, showed that consumer prices increased by 0.4% in April. That gain was in line with consensus expectations. As was the case with the companion Producer Price Index, which was issued by the same Bureau 24 hours earlier, the increase in inflation was mainly predicated on higher energy prices, with a modest assist from the food sector. The gain in energy costs in this index was 2.2%; the increase in the energy component of the PPI was 2.5%. Clearly, rising oil prices remain a concern at both the wholesale and retail inflation levels.

In all, the 0.4% increase in the aggregate CPI was a bit more than most inflation-watchers will be pleased with, especially the inflation hawks at the Federal Reserve. Thus, the 13% drop in oil prices thus far in May, which likely will presage lower inflation readings at both the producer and consumer levels this month--if the recent trends continue--should be welcome news among those economists worried that rising inflation could put a chill into this nation's maturing economic expansion.

As for the latest report, we saw that inflation had increased by 3.2% in the latest 12 months, a rate that is materially higher than it has been in recent years. The 0.4% gain for the latest month also represented the fifth straight month in which the CPI has been up by 0.4% or 0.5%. That series of higher readings follows four months in which CPI readings were either 0.1% or 0.2%. Earlier last year, most notably in May and June, the CPI had gone negative. That was the time in which the Fed had concerns about deflation; obviously, those concerns have eased, although the central bank is not yet fearful of a sustained sharp increase in inflation, preferring to believe that the current flare-up along the pricing front is largely transitory in nature.

As for the rest of the inflation picture last month, we saw that food prices rose by 0.4%, with the gain in food at home being 0.5%. Although those are somewhat inflated numbers, they were still the smallest such increases this year. Moreover, if we back out the twin volatile variables of energy and food, to get the so-called core rate of consumer prices, we find that the increase in inflation at the retail level last month was a more modest 0.2%. However, that was double the increase forecast.

As for the overall CPI rate, the 0.4% increase last month was one-tenth of a percentage point less than the estimated gain in March. The increases in December, January, and February were 0.4%, 0.4%, and 0.5%, respectively. As for food, the monthly gains this year have been, respectively, 0.5%, 0.6%, 0.8%, and the aforementioned 0.4%. Food at home, as shoppers will sadly note, has been rising as well, with the monthly rates being 0.7%, 0.8%, 1.1%, and 0.5%, respectively. Energy prices have been rising at rates of better than 2% every month since December of last year, meanwhile.

Overall, the picture is still somewhat troubling. Although we continue to maintain that moderate inflation, or even something a bit more than that, is less of a burden on the economy than is deflation, or falling prices, such increases are still worrisome. That is especially so if the gains are not as transitory as we earlier observed the Federal Reserve now maintains.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.